Why Investors Should Steer Clear Of Beacon Roofing (BECN) Now

In addition to smart buying decisions, exiting certain underperforming stocks at the opportune time helps in maximizing portfolio returns. One such stock that you may want to consider dropping from your portfolio is Beacon Roofing Supply, Inc. (NASDAQ:BECN) , as it has witnessed a significant price decline in the past year. Moreover, it has seen negative earnings estimate revisions for the ongoing quarter and current year. The innate weakness of Beacon Roofing is further ascertained by its Zacks Rank #5 (Strong Sell).

Recently, the company reported lower-than-expected results in third-quarter fiscal 2019. The top and bottom lines declined from the prior-year period, thanks to persistent weather challenges. Beacon Roofing reported adjusted earnings per share (EPS) of 92 cents, missing the Zacks Consensus Estimate of $1.24 by 25.8%. The reported figure also decreased 22% from $1.18 per share a year ago. Its fiscal third-quarter results were affected by weather challenges, primarily resulting from 25-30% more rain days than the prior year. This translates to an adverse impact of approximately $85 million on sales and 20 cents on adjusted EPS.

Let’s delve deeper.

Dismal Earnings Trend

During the first nine months of fiscal 2019, Beacon Roofing’s adjusted earnings of $1.21 per share decreased 25.3% on a year-over-year basis due to reduced gross margins and higher operating costs. On a further discouraging note, its earnings lagged the Zacks Consensus Estimate in six of the trailing nine quarters. Gross margin contracted 10 basis points (bps) to 24.5% during the first nine months of fiscal 2019. Operating expenses increased 100 bps to 23.4% of total net sales during the period. Adjusted EBITDA margin declined 80 bps year over year to 6%.

Meanwhile, let’s take a look at Beacon Roofing’s earnings estimate revisions in order to get a clear picture of what analysts are thinking about the company. In the past seven days, the Zacks Consensus Estimate for the current quarter and year has declined 3.8% and 5.5% to $1.27 and $2.60, respectively.

Bleak Fiscal 2019 View

Weather-related woes, higher costs and competitive pricing have been pressurizing Beacon Roofing’s margin over the last few quarters. Owing to continued weather-related woes in the fiscal second and third quarters of fiscal 2019, the company lowered its fiscal 2019 guidance. Adjusted EBITDA is expected in the range of $490-$510 million versus earlier projection of $540-$610 million. Adjusted EPS is now likely to be in the range of $2.30-$2.50 compared with the prior guidance of $2.90-$3.35.

Beacon Roofing vs. Industry Scorecard

Pricing Pressure & Stiff Competition

Of late, the commercial roofing market has been experiencing heightened competitive pricing pressure. Even though repair remodel represents the majority product demand for Beacon Roofing, the timing of these replacement decisions can vary due to economic factors and weather conditions. Notably, it belongs to a highly competitive industry. The maintenance, repair & operations supply market is highly fragmented, with many smaller local players competing directly on price. Furthermore, general market softness and uncertainty regarding weather conditions remain matters of concern.

Bottom Line

Looking at the prevailing challenges and an unfavorable Zacks Rank, it will be prudent to stay away from Beacon Roofing stock right now.

Key Picks

Some better-ranked stocks in the Zacks Building Products - Retail industry include BMC Stock Holdings, Inc. (NASDAQ:BMCH) , Builders FirstSource, Inc. (NASDAQ:BLDR) and Tecnoglass Inc. (NASDAQ:TGLS) . While BMC Stock sports a Zacks Rank #1 (Strong Buy), Builders FirstSource and Tecnoglass carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

BMC Stock, Builders FirstSource and Tecnoglass reported better-than-expected earnings in the trailing four quarters, with the average being 31.5%, 26.6% and 27.8%, respectively.

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